Can I claim deductions on a rental I'm living in?

Question from Jesse Owens updated on 4th July 2007:

My accountant has advised me that despite living in one of our rentals we can still claim all of the regular deductions if the company which owns the property rents it back to us personally. This seems too good to be true. Is it?

Our expert responded:

You're right, it is too good to be true! There have been a few cases over this in recent times which have highlighted this issue, although it has been more around home owners putting their home into an LAQC and then renting it back to themselves. There is no commercial reason why someone would do this other to gain a tax advantage and IRD have ruled that this is tax avoidance, which carries very serious and expensive penalties, not to mention the accounting fees incurred while you go through the income tax audit.

In your situation, I am assuming you have a number of rentals. Even so, IRD would probably view this as a very aggressive tax strategy. It may be OK if you only did it for say two months and you were paying market rent and it was because you were between family homes and very much a temporary situation. However, if it is your usual residence, then IRD will take a very dim view of this. If you do have to live in this property, my advice would be to not claim any costs, including depreciation, while you are living there. The costs of getting it wrong far outweigh any benefit you might get from a tax point of view.

Kenina Court is a director of Acorn Solutions Limited, an accounting firm dedicated to working with clients to help them create wealth. She is an avid property investor, entrepreneur and seminar presenter on asset protection and wealth strategies.



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